Indonesia Bulls Brace for Drop as Inflation Concern Mounts

Money managers who profited most from Indonesia’s 57 percent stock-market rally are preparing for a temporary retreat as valuations climb to record highs and inflation accelerates.

The MSCI Indonesia Index is poised to drop as much as 10 percent before resuming the advance that sent it to a record on May 1, say Samsung Asset Management and Panin Asset Management, whose stock picks in Asia’s sixth-largest economy helped their funds beat 97 percent of peers since May 2010. The MSCI index trades for 15 times estimated profits, versus 11 times for the MSCI EM Asia Index, a gauge of eight emerging markets in the region. The gap in April was the biggest since Bloomberg began compiling the data in 2006.

While profits have increased to a record amid nine straight quarters of economic expansion of more than 6 percent, inflation rose to a 22-month high in March and government plans to boost fuel prices may spur tighter monetary policy, said Samsung Asset’s Alan Richardson. The Hong Kong-based money manager and Panin Asset’s Winston Sual are still long-term bulls as Indonesia’s 250 million people boost spending on financial services and consumer products.

“The stock market could face more selling pressure in the short term as inflation rises,” said Richardson, whose $127 million Samsung ASEAN Equity Fund returned an annualized 30 percent during the past three years. “There will be opportunities to add” to Indonesian holdings after shares drop, he said. Richardson favors lenders such as PT Bank Mandiri whose floating-rate assets provide a hedge from rising borrowing costs.

Aging Rally

The 26-stock MSCI Indonesia index has gone 333 days without a retreat of at least 10 percent, the common definition of a correction. That’s the longest stretch in two years and the second most since 2005, data compiled by Bloomberg show.

Shares may begin falling this quarter, then rally in the final three months of the year, Richardson said. The retreat may have already started after Standard & Poor’s reduced its outlook on Indonesia’s credit rating to stable from positive on May 2, Panin Asset’s Sual said. The country has a BB+ rating at S&P, one level below investment grade.

The MSCI gauge gained 1.6 percent to 5,926.25 at the close in Jakarta, while the 463-stock Jakarta Composite Index rose 1.4 percent to 4,991.87, even after data showed the economy grew at the slowest pace in two years. Both gauges sank at least 1.1 percent last week.

Maksima Fund

Before today, the MSCI Indonesia Index had climbed 13 percent this year, versus a 0.3 percent drop in the MSCI EM Asia Index and a 1.2 percent retreat in the MSCI Emerging Markets Index. The Indonesia gauge had rallied 37 percent since the bottom of its last correction on June 4, a 17 percent slump that lasted about two months.

A “small correction could happen, especially after a strong rally like this,” Sual, who helps oversee about $1.3 billion as the president director at Panin Asset in Jakarta, said in a telephone interview. His firm’s $508 million Panin Dana Maksima fund returned an annualized 30 percent during the past three years, compared with 16 percent for the MSCI Indonesia index, data compiled by Bloomberg show.

Foreign money managers poured a net $7.4 billion into Indonesian shares since the end of 2010 as profits in the MSCI index rose 33 percent and record-low interest rates helped produce average annual economic growth of about 6.4 percent, outpacing the developing-nation mean of 5.7 percent.

Investor Rotation

The country’s $500 billion equity market, Asia’s ninth-largest, has also benefited from investors’ shift away from Brazil, Russia, India and China toward smaller developing economies, according to John-Paul Smith, an emerging-market strategist at Deutsche Bank AG in London. The MSCI Indonesia Index is the third-best performer among gauges in 21 emerging nations this year after the MSCI Philippines Index and the MSCI Turkey Index. The MSCI BRIC Index has declined 2.3 percent.

“There will come a point when you see a gradual rotation” out of Southeast Asian markets that have advanced the most, James Thom, a money manager at Aberdeen Asset Management Plc, which oversees about $322 billion worldwide, said in a phone interview from Singapore on April 19.

While Richardson and Sual say Indonesian shares are poised for short-term declines, they both have a bullish long-term outlook.

Indonesia’s middle class, defined by household expenditure of more than $2,500 a year, may grow to 141 million by 2020 from 74 million in 2012, Ferry Wong, an equity strategist at Citigroup Inc. in Jakarta, wrote in a March 20 report.

Bank Mandiri

Retail sales climbed about 14 percent in February from a year earlier, led by an 18 percent increase in motor vehicle parts and accessories, according to a central bank survey. That compares with the 12 percent increase in Chinese retail sales during the January-February period, which included eight public holidays.

Richardson and Sual favor shares of Bank Mandiri, Indonesia’s second-biggest listed lender by market value. The Jakarta-based company benefits from rising borrowing costs because yields on its floating-rate assets will increase faster than the bank’s liabilities, Richardson said.

Bank Mandiri posted on April 29 a 26 percent jump in first-quarter net income. The stock, which has risen 24 percent this year, is valued at 12.4 times estimated 2013 earnings, based on the average of 28 analyst projections compiled by Bloomberg. That’s a 17.6 percent discount versus the MSCI Indonesia gauge.

Biggest Producer

Indonesia’s economic growth and foreign capital inflows are slowing. The central bank cut its 2013 economic expansion forecast on April 11 to between 6.2 percent and 6.6 percent from the previous estimate of 6.3 percent to 6.8 percent, citing the drag on exports caused by the recession in Europe.

Overseas shipments tumbled 13 percent in March, versus the 6.3 percent drop forecast by economists in a Bloomberg survey, amid waning revenue from the nation’s palm oil and coal. Indonesia is the world’s biggest producer of palm oil, which has retreated 7.6 percent in Kuala Lumpur trading this year.

Indonesia’s economy expanded 6.02 percent in the three months through March, statistics bureau data showed today. That compares with a 6.11 percent pace reported previously for the fourth quarter of 2012 and the median estimate of 6.1 percent in a Bloomberg News survey of 26 economists.

Tighter Policy

The nation will probably raise subsidized fuel prices in May, President Susilo Bambang Yudhoyono said at a national development planning meeting in Jakarta on April 30. The price increase may ease concerns about the budget deficit and stem the rupiah’s 5 percent depreciation against the dollar during the past year, Deputy Finance Minister Mahendra Siregar said in an April 24 interview in Jakarta. The government spent about $22 billion on fuel subsidies last year, official data compiled by Bloomberg show.

Higher energy costs this year may boost inflation to as high as 6.5 percent, Citigroup said in an April 29 report. Consumer prices increased at a 5.57 percent annual pace in April after climbing 5.9 percent in March, the quickest rate since May 2011. The central bank will probably boost the rate it pays lenders on overnight deposits, known as the Fasbi, by 0.25 percentage point by the end of the second quarter to 4.25 percent, Citigroup said.

“The belief is that interest rates have bottomed and future monetary policy direction will be tightening, especially since fuel subsidies are to be cut,” Samsung Asset’s Richardson said.

‘Bit Expensive’

Foreign inflows into equities are dwindling as valuations increase. Net purchases fell to $74 million in April, a four-month low, from $189 million in March, according to Jakarta Stock Exchange data compiled by Bloomberg.

The MSCI Indonesia index’s forward price-earnings ratio has climbed to 15 from 11 in June. That compares with an average of 13 since Bloomberg began compiling the data in January 2006.

“It’s a bit expensive,” Dennis Lim, a money manager who helps oversee about $48 billion in emerging markets for Templeton Asset Management Ltd., said by phone from Singapore on April 24. He says a retreat of about 15 percent “will be a signal to go in and hunt again.”

(Updates with GDP data in 7th, 20th paragraphs)
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